One Size Does Not Fit All in Commercial Arbitration Agreement Provisions

Most business people understand the need for their contracts to be clear and specific.    However, when incorporating arbitration clauses in commercial agreements, many of those same business men and women use vague and outdated stock language that does not address or include key provisions that have a tremendous impact on the cost and timing of arbitration proceedings. This article contains suggested concepts and language to negotiate and include in commercial arbitration clauses.
 
Negotiate and Select the Arbitration Service Provider
 
Parties negotiating commercial arbitration clauses often employ form paragraphs that provide for dispute resolution using the services of the American Arbitration Association (AAA), but the AAA is not always the most efficient arbitration service provider. The AAA imposes significant fees and administers its cases from Fresno or Dallas. In its favor, however, the AAA has well-developed procedural rules and a large panel of qualified arbitrators.
 
We recommend that parties negotiating arbitration clauses consider locally-administered alternatives. JAMS (formerly Judicial Arbitration Mediation Service/Endispute) is the strongest alternative arbitration provider in the national market. JAMS also has local organizations that are well-established and have significant arbitration experience.  Parties should feel free to designate any mutually-acceptable arbitrator, but they should carefully provide specific arbitration rules to guide the arbitration process.  
 
Tailor the Arbitration Clause To Fit Your Needs
 
Contracting parties possess, but do not always exercise, significant control over the course of future arbitration proceedings. Contract negotiators should tailor their arbitration clauses to reflect their preferences with respect to following issues.
 
1. Identify Industry-Specific Arbitration Rules. Generically incorporating an arbitration provider’s rules will not suffice because both the AAA and JAMS have several alternative rule sets. 

• Deliberate choices should be made among AAA’s specific arbitration rule sets, including: commercial, commercial finance, class arbitrations, construction, employment, energy, healthcare, insurance, intellectual property, international, internet, professional sports, real estate, securities, and wills and trusts.
• If adopting the JAMS rules, the parties should decide among the following rule sets: comprehensive arbitration, streamlined arbitration, class action procedures, employment arbitration, suretyship arbitration, bracketed (or high-low) arbitration, and final offer (or baseball) arbitration. Each organization also has special rules for expedited proceedings.

2. Provide For Emergency or Interim Equitable Relief. Prior to the formal appointment of the arbitrator(s), a party may have a need for emergency or interim relief, such as a temporary restraining order. The parties should ensure that their arbitration rules allow the parties to petition the courts for such relief prior to the appointment of the arbitrator(s). Alternatively, the arbitrator provider must be empowered to appoint an interim arbitrator with authority to issue emergency or interim relief. Parties should stipulate that their arbitration clause does not preclude a party from seeking provisional remedies or aid in obtaining arbitration from a court of appropriate jurisdiction.
 
3. Address The Number, Expertise and Neutrality of Arbitrators. The parties should decide whether to provide for one or three arbitrators.  The parties may also want to stipulate that any arbitrator must have a certain level of expertise in a particular industry. In some types of commercial arbitrations before three arbitrators, it was the traditional practice for each party to appoint one arbitrator (a “part-appointed arbitrator”) and for one additional arbitrator to be designated by the party-appointed arbitrators, or by the parties, or by the administering institution. A party to this type of arbitration arrangement may no longer have a reasonable expectation of the partiality of its party-appointed arbitrator, however, due to the relatively new Code of Ethics for Arbitrators in Commercial Disputes, adopted March 1, 2004 by the AAA and a special committee of the American Bar Association. The new rules demand neutrality from all arbitrators—even party-appointed arbitrators—unless the arbitration clause reflects a clear intention to the contrary. As a result, if a party desires the right to appoint an impartial arbitrator, the parties must specifically express in their arbitration agreement their intention that their party-appointed arbitrators may act impartially.
 
4. Control The Discovery Process. One of the benefits and risks of arbitration is relatively limited discovery. The parties negotiating an arbitration clause should determine what level of discovery they would require in order to fairly present their case at an arbitration hearing. JAMS’ Comprehensive Arbitration Rules & Procedures requires voluntary exchange of all non-privileged documents relevant to the claims, and allows one deposition of an opposing party and one individual under the control of the opposing party, and affords the arbitrator authority to allow additional depositions as necessary. The AAA’s Commercial Arbitration Rules do not explicitly allow formal discovery, but AAA’s Procedures for Large, Complex Commercial Disputes provides for document discovery and affords the arbitrator discretionary authority to order depositions. We advise parties to take control of the discovery process and set forth clear provisions and limits concerning document disclosures, electronic document productions, expert disclosures, interrogatories, requests for admissions and depositions.
 
5. Designate A Convenient Hearing Locale and Logical Applicable Law. Unless the parties pay attention to the required hearing location and choice of law provisions, they could find themselves traveling to an inconvenient hearing locale and using state law that has no logical application to the parties’ dispute. We suggest parties consider where the witnesses to potential disputes are located and establish the hearing at that place. If both parties insist on their own principal place of business, we suggest the parties allow for a split hearing that occurs in both places. Similar attention should be paid to the governing law. It may not make sense for specific lending and lien laws of one state to be applied to a project in another state.
 
6. Strive To Ensure Finality. At the conclusion of the arbitration process, the arbitrator will issue an award. The parties must then present that award to a court to obtain a judgment. The losing party may also seek to attach the validity of that award. This process is generally conducted pursuant to the provisions of the Federal Arbitration Act, or a parallel state law, generally a derivative of the Revised Uniform Arbitration Act. Parties should provide for this by way of a statement in the arbitration clause, such as: “Judgment on the Award may be entered pursuant to the Federal Arbitration Act, 9 U.S.C.A. § 1 et. seq, in any court having jurisdiction.”

This legal update is for informational purposes only as a service to clients and other friends, is not a complete summary of the rules relating to the subject matter discussed above, and is neither to be construed as legal advice nor intended as basis for decisions in specific situations. For more information about this subject matter or other recent developments, please contact the attorneys in our Commercial Litigation practice group or any other attorney in our firm with whom you normally consult by calling (303) 825-4200. 

About the Author:
Stephen D. Gurr is an experienced civil litigator with 17 years of trial experience in federal, state and arbitration forums. He is an American Bar Association-trained arbitrator and the head of the Kamlet Shepherd & Reichert  litigation practice group.